Merger arbitrage: the 3 questions I think matter before buying any announced deal

I've been digging pretty deeply into merger arbitrage recently. Buffett used to call these situations "workouts", and I think they're one of the more interesting corners of value investing.

the basic idea sounds almost too easy:

a company agrees to be acquired for $50.
the stock trades at $48.50.
if the deal closes, you make $1.50.

but the spread by itself tells you almost nothing.

say the stock falls to \~$38 if the deal breaks. you're risking $10.50 to make $1.50.

with those numbers, the simple break-even probability is 87.5%.

but then there's opportunity cost. if T-bills would return \~2% during the six months you're waiting, the deal actually needs roughly a **95.6% probability of closing just to beat the risk-free alternative**.

that's the part I found most interesting.

I've ended up reducing the whole process to three questions:

1. **will the deal close, and on what terms?**
2. **when will it close?**
3. **what happens to the stock if it doesn't?**

everything else, the merger agreement, regulators, financing, shareholder votes, outside dates, etc., is really just evidence for answering those three questions.

I ended up writing a pretty extensive guide going through the whole process, including the math, break prices, regulatory risk, financing, stock deals, portfolio construction, and a worked example:

[https://www.jeravalue.com/en/blog/merger-arbitrage](https://www.jeravalue.com/en/blog/merger-arbitrage?utm_source=chatgpt.com)

I wrote it, so obvious self-promotion disclosure.

curious how people here approach these. **what minimum spread / expected return do you require before a merger arb becomes worth the downside risk?**

I think this will work **much better** than framing it as "I wrote a beginner's guide to merger arbitrage." It gives them an interesting claim to argue about, proves there's substance before the link, and the final question naturally turns it into a discussion rather than an ad. Merger-arb and special-situation discussions already have precedent in the subreddit, including posts explicitly connecting the strategy with Buffett and Graham.